Top NY court to hear arguments on unfinished-business claims concerning failed law firms

When a law firm fails, is its unfinished business property that can be distributed by a bankruptcy trustee?

That is the question on which New York’s highest court will hear arguments Wednesday, at the request of a federal appeals court, the Wall Street Journal (sub. req.) reports.

After two federal trial court judges in the Southern District of New York reached different conclusions on the issue, the New York-based 2nd U.S. Circuit Court of Appeals asked the New York Court of Appeals to weigh in.

In a case that is being closely watched by law firms that hired partners from Dewey & LeBoeuf, among other interested observers, the court has been asked to decide two certified questions, explains an article by two Wiley Rein attorneys on the law firm’s website. First, whether unfinished business taken by partners of a failed law firm to a new law firm is the property of the defunct firm and, if so, how state law defines a client matter and how much of the profit may be retained by the new firm in an ongoing case.

The actual matters at issue in the New York appeals court case came from cases stemming from the bankruptcies of Coudert Brothers and Thelen. However, the court’s answer to the question of whether client matters are property is expected to be influential in other law firm bankruptcies, too.

The American Bar Association has filed an amicus brief. It says unfinished business belongs to the client, not to the law firm that provided legal representation.

“The contention that an unfinished hourly rate client matter of a dissolved law firm is the property of the dissolved firm conflicts directly with the long-standing principle that the client has the right to control its relationship with its attorney,” argues the ABA brief. “The dissolution of a client’s prior law firm provides no basis to override this fundamental and deeply held principle.”